Publications: Notes at the Margin

Misled by Models, Impending Impact of Vulture Capitalists, and More Than Enough Futures Contracts (May 1, 2017)


This report addresses three separate topics. First, refiners, OPEC, and most of the world have been misled by models, modelers, and the forecasters using the models. Refiner profits will fall well short of predicted levels over the year because firms have been fooled by optimistic fuel consumption forecasts, particularly in the United States. Crude prices will be pulled down by the decline in product use.


The second part of the report addresses the impact that hovering vulture capitalists will have on long-term investment in oil. On Saturday, The New York Times reported that a major investment manager that invests almost $300 billion for pension funds, sovereign wealth funds, and individuals had aggressively worked with hedge funds and others to force changes in policy at Whole Foods, a major high-end grocer in the US. The action may portend similar attacks on any multinational oil company listed on the US or European equity exchanges that is contemplating large, long-term investments. This increased investor activism will likely prevent the majors from engaging in the type of projects they have historically undertaken.


Finally, we remind readers of the work by academics on the ideal size of futures markets. A misleading article in Financial Times suggests that the crude oil futures market was suffering because the number of contracts deliverable in three or four years has declined more than seventy-five percent as the market grew forty percent. The FT author concludes that the focus has shifted to the short term. This is nonsense. As noted below, academics have written often and traders have demonstrated that buyers and sellers do better when there are fewer contracts and greater open interest and liquidity. The shape of the price curve also matters.


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